Iraq lures US hotel chains banking on business

Iraq, after eight years of occupation by American troops, is
luring US hotel operators and developers betting on growth from business
expansion and an eventual pickup in leisure travel to the war-torn region.

Best Western International Inc plans two hotels under its
Premier brand in Erbil, Iraq’s fourth-largest city and the capital of Iraqi
Kurdistan in the northern part of the country. Marriott International Inc.
expects to operate two properties in the city. Hilton Worldwide, owned by
Blackstone Group, is planning a 200-room Hilton DoubleTree Suites in Erbil.

The hotel companies are following growth in Iraq by
businesses including General Electric Co. and Exxon Mobil Corp. as the US
prepares to withdraw its remaining troops by the end of the year. The Kurdistan
region, in particular, is attractive for hospitality projects because of its
relative safety and decades of neglect under Saddam Hussein’s regime, said
Stephen Lari, principal at New York-based Claremont Group, which is spending
$32m to develop Erbil’s Hilton DoubleTree.

“We were drawn to the region due to its stable and
functioning regional government, a desire for American investment, a safe
security environment, strong economic growth and an ever-more sophisticated and
prosperous populace,” Lari said in an e-mail. It also has “a strong and
favorable investment law, and an enormous pent-up demand for residential and
hospitality development,” he said.

Demand for lodging in Iraq probably will be limited to
business workers as kidnapping and terrorist violence remain concerns. The US
Department of State warns Americans against all but essential travel to the
country given “the dangerous security situation,” according to its website.

“Some regions within Iraq have experienced fewer violent
incidents than others in recent years, in particular the Iraqi Kurdistan
region,” the State Department said in a Sept 13 statement. “However, violence
and threats against US citizens persist and no region should be considered safe
from dangerous conditions.”

A possible lack of fresh water, electricity and
communications systems also can be obstacles to doing business in the country,
said Jan Freitag, senior vice president at Smith Travel Research Inc. Against
this backdrop, US hoteliers may benefit from increased demand from workers
seeking familiar brands, he said.

“Western hotels are
often seen as safe havens from the craziness outside their own four walls,”
said Freitag, based in Hendersonville, Tennessee. “Reporters, oil workers,
diplomats are willing to pay extra to sleep safely, work safely and - as
importantly - eat safe food. If the hotel can deliver, then it makes sense for
them to expand into high-risk areas.”

The State Department has pushed to get more US businesses
into Iraq. Secretary of State Hillary Clinton has mobilized her agency to help
companies like Boeing Co. and PepsiCo Inc. to compete there by focusing on
building economic links, Robert Hormats, the State Department’s under secretary
for Economic Affairs, said in a July interview.

Article continues on
next page…

Exxon, based in Irving, Texas, signed contracts with the
Kurdistan Regional Government to explore six blocks in Iraq’s north, Michael
Howard, an adviser to the regional authority, said on Nov. 11. GE is helping to
increase electricity production and distribution in the country, according to a
Nov. 21 statement from the Fairfield, Connecticut-based company. It last month
opened three offices there, including one in Erbil.

Stability in the northern Iraq region has created a favorable
environment for foreign business, according to Michael O’Hanlon, senior fellow
at the Washington-based Brookings Institution, which does public policy
research and analysis.

“The area is ethnically homogeneous,” O’Hanlon said in an
interview. “There’s no tension within the Kurdish population and it has had
some autonomy. That’s created a more stable environment as compared to the rest
of Iraq to do business in.”

Foreign investment will be limited because of Iraq’s
constrained natural resources, mountainous terrain and shared border with Iran,
according to O’Hanlon.

“I don’t think the importance of the area should be
overstated,” O’Hanlon said. “If you start looking at the magnitude of
investments in northern Iraq and future expectations, most investors don’t look
at Kurdistan as a major oil producer. Being there is more like a foot in the
door to the rest of Iraq.”

Best Western, the biggest closely held hotel chain, expects
to operate a 16-room property in the center of Erbil that will command rates at
an average of $400 a night, Chief Executive Officer David Kong said in an
interview earlier this month. The Phoenix-based company also is planning an
82-room hotel near the city’s airport with an average rate of $200 per night.
Both properties are expected to open in late 2013.

“Erbil is least affected by any uncertainty in Iraq and the
Gulf war because it’s located in northern Iraq,” said Kong, who is seeking
other hotel opportunities in the country. “This area has seen the biggest influx
of economic activity, highest growth and has the fastest-growing real estate
markets.”

Marriott three years ago explored opening hotels in the
country but decided against it, said Ed Fuller, president and managing director
of international lodging. It is now planning a 200-room Marriott-branded hotel
and a 75-unit property under its high-end, extended-stay Marriott Executive
Apartment brand that are slated to open in 2014.

The Bethesda, Maryland-based hotelier, which has about 40
hotels across the Middle East, intends to add another 50 in the region in the
next four years, Fuller said. He expects almost all of the demand in Iraq to
come from business travellers.

“There’s no leisure travel to talk about at this point,”
Fuller said. “It’s like Saudi Arabia - the only leisure travel there is
religious. Everything else is business.”

Hilton also is looking to expand in Iraq beyond Erbil.

“It’s good to be early in an area, particularly in the
Middle East, as the region is one of relative underdevelopment,” said Ian
Carter, president of global operations and development at the McLean,
Virginia-based company. “We will almost certainly do other projects in Erbil.
We are in negotiations for other projects in the region.”

Article continues on
next page…

None of the three hotel companies are investors in the Iraq
projects, limiting their financial risk. As management companies, hoteliers are
only responsible for operating a property under one of its brands, without
having any costs associated with the underlying real estate acquisition.
Companies in the franchise system, such as Best Western, provide access to
their distribution network or the use of their brand name, while independent
operators run the hotel.

Best Western teamed with Iraqi developer Golden Mountains
Co. for the $20m airport hotel and the $40m city project.

“The bright future of Kurdistan’s economy (oil and gas
exporting) is an important reason for us to take the initiative for investing
in the two properties,” Handren Azzo, chairman at Golden Mountains, said in an
e-mailed statement. The region is currently lacking any international high-end
hotels, he said.

Claremont Group, Hilton’s partner, is also building a 1,600-unit
mixed-use gated community, called the Atlantic Villas & Apartments, near
Erbil’s business district and international airport.

Marriott partnered with local developer Empire Iraq, which
will invest more than $100m in the two projects, according to a statement on
its website.

“We believe we can make it work,” Marriott’s Fuller said.
“But I don’t really have any past comparison of a similar situation as given
here in Iraq. We haven’t gone into an area before where there had been an
active war. We’ll have to see.”